Wednesday, December 12, 2007

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

I'll let others comment on Greenspan's historical narrative, but I'd like to point out that the inventory overhang includes more than "inventories of newly built homes". The overhang also includes excess rental units and vacant existing homes. See: Housing Inventory and Rental Units.

And to Greenspan's final sentence:

"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."J. Maynard Keynes, A Tract on Monetary Reform